Utility of the Future: Insights from Colorado’s Energy Transition

Technocrats, sitting in their colorful offices in Silicon Valley and the hallowed halls of Cambridge institutions, would have us believe that to solve the biggest global energy challenges, we will need to journey down a path of massive, unprecedented disruption. Ubiquitous presentations promise to digitize the world’s problems away, and assure us that legacy utilities with their old business models and boring dress codes will soon have zero impact on our daily lives. However, Xcel Energy and its Colorado Energy Plan may offer a striking counterpoint to this logic.

Researchers from MIT shared their vision for the Utility of the Future, where a decentralized, “self healing” grid would replace the heap of old wires we have today. New business models would materialize if only regulators would accept total market transformation. These pronouncements fill the pages of Wired Magazine and give us something to chat about at cocktail parties, while the real future is quietly unfolding right under our noses in Colorado.

MIT’s Utility of the Future study, published in December 2016.

Tucked away in unexceptional office buildings and dated municipalities, Xcel Energy, a legacy utility with a boring dress code and a century old business model, is working alongside policy makers, public utility commissioners, and engaged stakeholders, to transform the State’s power grid. In an effort similar to Germany’s Energiewende, Colorado is on track to meet 55% of its electricity supply with renewable energy by 2026, and reduce CO2 emissions by 60% below 2005 levels over the same period. They are pulling this off without significant rate hikes to consumers or disruptions to reliability. This energy transition is challenging long standing assumptions on the economics and technical feasibility of a carbon free grid. Where it is headed offers a far more tangible carbon free energy future than any proclamation has yet offered.

Background on Colorado’s Energy Transition

Xcel Energy’s commitment to energy transition was not a unilateral proclamation. It came about as a response to customer demand. In 2011, residents of the City of Boulder voted in favor of a ballot to divorce itself from Xcel Energy and establish its own municipal utility. As one ballot supporter stated, “They [Xcel] don’t have our interests at heart,” referring to the portfolio of coal assets that Xcel continued to operate, and that comprised 57% of it’s portfolio at the time. This initiated a 6-year process of joint working-groups and often adversarial negotiations. Among the issues that needed to be resolved was the transfer of assets from Xcel to Boulder.

Throughout the rounds of negotiations, public hearings, PUC filings and even a lawsuit that proceed, the City of Boulder offered Xcel several opportunities to “partner” with the city, including asking that Xcel reduce the price of wind power for Boulder customers and remove a cap on wind generated south of Boulder.

Part of Xcel’s Cherokee Generating Station is a 928 MW Coal Plant outside of Denver.

Under the specter of more customers following Boulder’s lead, Xcel Energy submitted a new Electricity Resource Plan (EPC) in 2016, changing its posture, and adopting a commitment to “better serve our customers across the state…” by “keeping your energy costs low” and to “deliver increasingly cleaner energy…” In August 2016, CPUC approved a series of filings whereby Xcel would move forward with programs that offered customers greater resource diversity and access to renewables, while removing the transmission premiums that it had levied on renewable power. This met more customer demand for renewables, and it established conditions that would make municipalization an even less feasible option for customers seeking affordable, clean energy.

In 2017 Xcel unveiled its proposed Colorado Energy Plan (CEP), laying out a more defined roadmap to meet rising energy demand with more renewable energy and lower carbon emissions, at rates that still undercut the national average. Xcel laid identified three clear goals: 1) increase total production to meet growing demand; 2) meet 55% of its total supply with renewable energy by 2026; 3) reduce emissions to 60% below 2005 levels, also by 2026. To get there, Xcel plans on cutting its coal power supply by 30% and reducing 50% of it’s natural gas generation. As a first step, the CEP requested approval to retire place 700 MW of coal powered generation in early retirement, and replace that capacity with wind and solar power. As additional coal plant move to retirement beyond 2026, Xcel believes that it will be on the road to achieve a zero carbon portfolio.

Source: Western Resource Advocates

In early 2018, Xcel received 350 proposals for solar and wind projects, many of which included energy storage. The median prices offered for wind, solar, and combined storage projects all fell sharply below the lowest documented prices previously offered anywhere else in the US, and they significantly undercut coal and natural gas.

This past August, CPUC gave final approval for Xcel’s CEP. In moving forward with its plan, Xcel will move to invest $2.5 billion to add over 1,100 megawatts of wind generation, more than 700 megawatts of solar generation, and 275 megawatts of battery storage onto Colorado’s grid. Xcel will also retire the Comanche 1 and 2 coal plants, comprising 700 MW of existing capacity, a decade early. Despite this lofty investment, Xcel is promising to save money for the rate payers. The CEP outlines $200 Million in anticipated savings for Colorado ratepayers. Decommissioning coal plants and operating lower cost resources offsets the burden of the associated capital investment. Furthermore, Xcel anticipates that it will drive further savings by avoiding compliance costs for anticipated emissions regulations as it moves to downsize its coal fleet.

As Xcel Energy takes on bold moves for a regulated utility, Colorado’s biggest cities and counties are upping the ante even higher. At least ten of the state’s most populous and prominent regions have set 100% renewable energy goals, most of which are set to be achieved by 2030, and none of them any later than 2035. As one executive from excel put it, “We will eventually have a zero carbon power grid. Xcel would rather lead in that direction, than get dragged there.” With so much customer demand, Colorado provides a unique foothold for Xcel to assume that leadership.

Turning Customers into Allies and Taking Advantage of the Stakeholder Brain Trust

During the rounds of public hearings and back room meetings between Xcel Energy and the City of Boulder, the latter gained volunteer support from a team of experts, including researchers from National Renewable Energy Laboratory (NREL) and University of Colorado. These experts assisted Boulder in assessing the cost and technical feasibility of various generation portfolios. The team, referred to as “RenewablesYES!”, provided Boulder with a roadmap to double its renewable energy supply, halve its carbon intensity and “greatly reduce other forms of fossil fuel-related pollution at rates that would meet or beat Xcel’s.”

Through ongoing rounds of negotiation, public hearings, a lawsuit, and PUC filings, citizen leadership in the technical review process influenced Xcel’s process of evaluating its own portfolio. This helped Xcel fuel its own effort to devise a more ambitious renewable energy roadmap, and likely contributed to the partnerships that it formed with renewable energy and environmental advocacy groups. These many of these groups aided Xcel in formulating the CEP, and that have been strong supporters of Xcel’s efforts in front of CPUC.

Xcel intelligently turned its proceedings with Boulder into an opportunity to draw a new relationship with the stakeholder groups that would be difficult opposition if they were not key allies. In its 2017 CEP filing, Xcel listed numerous renewable energy coalitions, consumer advocacy groupd, and even energy think tanks that participated in the plan formulation. The Western Resources Advocates was one of the major partners.

Cities and counties across Colorado are seeking to go 100% renewable.

Firm Renewable Power Beats Natural Gas

In January 2018, Xcel released the results of the All-Sources-Solicitation that it issued in late 2017. The response was striking. In contrast to the 55 responses that Xcel had received in its 2013 solicitation, this time around 430 bids were submitted, 350 of which were for solar and wind projects comprising 100 GW of total capacity. Over 100 of these proposed renewable projects included battery storage, comprising 27 GW of total capacity. In other words Xcel was looking at 27 GW of firm renewable energy, with the same dispatchability and load control as the traditional fossil fuel resources.

If that is not astounding enough, the game changer was in the costs that were proposed for these projects relative to Colorado’s existing fossil fuel resources. The median price offered for Solar + Storage came out to $36/MWh while Wind + Storage was offered at a median cost of $21.50/MWh. With natural gas selling at $40 – $60/MWh and the state’s coal power supply selling for even higher, Colorado is seeing a new reality unfold where renewable energy, made firm and dispatchable with battery storage, is technically and economically scalable, even in the most competitive power markets.

The Vertically Integrated Utility-of-the-People

Xcel’s guiding principles to working with partners such as municipalities and coops. Xcel has taken a tone that utilities operate best when planning is a multi-lateral activity taking place outside of formal regulatory hearings.

Energy market deregulation was intended to establish competitive markets that would stabilize, if not lower costs for rate-payers, while creating greater transparency. The data on whether or not deregulation helped achieve these goals is inconclusive. Natural gas has been a major factor in driving down the cost of electricity since 2005. The same market construct that enabled the rapid expansion of natural gas generation led to rapid growth in wind and solar power in these markets. That same mechanism, however, limits their continued scalability. As fossil fuels comprise a smaller portion of the resource mix, renewable energy generators must rely more and more on long term power-purchase-agreements to ensure that they will achieve a viable return. But wholesale markets are not going away any time soon, and a 10-year power purchase agreement does not make sense to most customers. The answer to this challenge falls back to benefits of regulation.

These truths lead to difficult questions about the chances of achieving grid transformation in deregulated markets. Colorado would not be on track to deliver on its 2026 goals were it not for the centralization of accountability and oversight that can only be promised by a vertically integrated utility. But owning the entire energy value stream is not enough. The challenges of energy transition require significant changes to the governance and planning culture of most regulated utilities in the US today. Again, Colorado is charging ahead to create this future.

Xcel took many lessons away from its experience with Boulder, and the utility institutionalized the way it works with cities, municipalities, and other governance organizations as a result. As cities like Denver, Longmont, Pueblo and Fort Collins have approved county-wide RPSs of 100% renewable energy by anywhere from 2020 to 2035, Xcel has opted to partner with them in achieving these goals, maintaining its role as their utility. According to Jaren Luner, a public policy analyst at Xcel Energy, when cities approach Xcel with a plan to meet 100% of their demand with renewables, “’No that’s now how it works’ isn’t an answer that is acceptable to our cities. We need to incorporate their goals into our resource planning.”

Why Look to Colorado?

Colorado is not the only state that set ambitious clean energy goals. California and Hawaii have both committed to achieve 100% renewable energy by 2045. They are seeing rapid growth in their renewable portfolios. In both states, however, rate payers are seeing their energy bills escalate to over 50% above the national average. In contrast, Xcel Energy met 28% of its Colorado energy supply with renewables last year. Its customers’ paid energy bills were an average of 33% below the national benchmark. The Colorado Energy Plan estimates that customers will continue to see savings, and by 2030, Colorado rate payers will save as much as $200 million.

An energy transition similar to Colorado, is necessary if we are going to collectively meet the emergent challenges of climate change, resource scarcity and infrastructure vulnerability. On the face of it, the US power grid is a regulatory jungle of balkanized markets and aging infrastructure, making massive transformation almost impossible. At closer look, Colorado may be the oracle that can providing a roadmap for other states to follow. What might that energy future look like?